The Securities and Exchange Commission filed a lawsuit Friday against Miami, Fla. and the city’s former budget director, charging them with securities fraud for making faulty disclosures in connection with three 2009 bond offerings totaling $153.5 million.
The suit, filed with the U.S. District Court for the Southern District of Florida, alleges that beginning in 2008, Miami and Michael Boudreaux made “materially false and misleading statements and omissions” about interfund transfers designed to cover up a growing general fund deficit and get more favorable bond ratings for offerings in May, July, and December 2009. They also included false and misleading information in the city’s fiscal year 2007 and 2008 comprehensive annual financial reports, the SEC lawsuit charges.
The SEC also charges Miami with violating a cease-and-desist order that was imposed on it in 2003 for similar misconduct. This is the first time the SEC has alleged further wrongdoing by a municipality already subject to an SEC cease-and-desist order.
“Beginning no later than 2007 until 2009, the city engaged in a series of transfers from its capital projects funds to its general fund to mask the general fund’s deficits, transferred restricted funds into the general fund, and falsely inflated the general fund balance to achieve the city’s goal of maintaining $100 million in reserves in its general fund, and ultimately obtain ... more favorable ratings on its bond offerings,” the lawsuit states. “To obtain the city commission’s approval of these inter-fund transfers, Boudreaux made misrepresentations to it about the transfers, which falsely represented that the project funds were unallocated, and concealed the transfers in the city’s internal records.”
The lawsuit seeks financial penalties and a permanent injunction from committing further securities laws violations against both the city and Boudreaux, 47, who was the city’s budget director until his termination in March 2010. He now lives in New Orleans. Boudreaux proposed transfers beginning in 2007 that improperly appropriated funds and also prevented the city from meeting its legally-required reserve of 20% of annual revenue.
The 2003 cease and desist order was issued in connection with very similar charges regarding bond sales in 1995, in which the commission alleged Miami had misled investors about the city’s worsening financial condition. The city maintained then, and now, it has done nothing wrong.
“Miami cannot continue to play shell games with its finances,” said Eric Bustillo, director of the SEC’s Miami regional office. “Investors and the markets deserve complete transparency in assessing the city’s municipal bond offerings.”
“Miami actively marketed bonds to the investing public while hiding the true reason for interfund transfers to boost the image of its primary operating fund,” said George S. Canellos, co-director of the SEC’s enforcement division. “The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable. We will hold accountable not only municipalities, but also individual municipal officials for fraudulent disclosures to investors.”
But Ivan Harris, a partner at Morgan, Lewis & Bockius, which represents Miami, defended the city’s behavior and questioned the validity of the SEC’s legal reasoning. “When a municipality like the city can make detailed disclosures that comply with GAAP [general accepted accounting principles], get clean audits, not default on its bonds, and its bond prices remain stable, but still gets sued for fraud, you have to wonder what the SEC is thinking,” Harris said.
Harris said one of the three bond issues cited by the SEC, a $65 million issue of special revenue street and sidewalk bonds, has nothing to do with Miami’s general fund. The bond are backed by local fuel taxes and parking surcharges, he said.
Attorneys for Boudreaux could not be reached for comment.